Hello, I would like to understand in which scenarios a company would choose to acquire an existing buildin or project vs construct an entirely new one from undeveloped land. For example, if parts are hard to come by or if interest rates are high (and construction may run over), would this be a scenario where a firm might do an acquisition instead?
I understand that building from scratch would give a firm more control over the whole process but just trying to understand when a firm would finance a project from construction vs acquiring an existing project.
Scenarios where construction ground up makes more sense:
1.) The building is completely dilapidated and will be more costly to renovate than to just tear down and rebuild
2.) Developer wants to build a completely different use and the current building cannot be easily converted Ex. Office to residential
3.) Similar to point 2, developer wants to build denser, but the existing building can't be easily converted Ex. SFH to low/midrise multifamily
Scenarios where keeping the existing structure makes more sense:
1.) The "bones" of the structure are good and the building can be easily converted to the new use. In summary, lower construction cost
2.) Building is outdated and just needs a renovation. Construction cost to renovate is lower than building ground up
3.) Historically protected building that cannot be taken down
4.) Historic property that the city would prefer to be preserved and thus grants the developer bonus incentives to preserve the structure such as more FAR than is allowed by zoning code etc...
5.) Size of the existing building is larger than what is allowed by code (this is called a "grandfathered" building), so if you take the building down, you can't build as large
For the most part, the reason to keep an existing building has to either do with laws preventing the demolition or it makes more sense financially to keep the structure either by lowering cost or getting incentives for preserving it
Thanks for the great detail. So, does the macroeconomic environment, for example, not impact whether M&A deals happen more often? It's more about the building itself?
I'm not really sure why you keep using M&A. You can't really merge two buildings together like a company. As for transaction activities, macroeconomic environment absolutely impacts real estate transactions. I mean macroeconomic environment impacts every industry. Real estate is very sensitive to interest rates because real estate is a highly leveraged asset. What does this have to do with the building? I'm not really understanding your question. Macroeconomics will affect transaction activity and development/construction activity, but it doesn't really affect whether not a building should be demolished and built from scratch or renovated.
I would even go so far as to argue that it's got nothing to do with one or the other. It's like asking why some restaurants prepare Vietnamese food and some are steakhouses. Sure, at the end of the day each one could follow and a recipe and make the other, but fundamentally they're in the business of selling different types of food.
Constructing a new building is simply not the same job as acquiring an existing one. And to ask why build or buy brings in a lot of existential questions about personality types and risk preferences and whatnot
The reason i'm asking is that I believe transactions at developers are M&A or financing so how is it determined which deal type is done?
I have absolutely no idea what you are asking. Developers develop buildings...you're speaking like we are talking about investment bankers. What do you mean transactions at developers are M&A or financing? Developers acquire land/property and develop/renovate them. They need debt and equity financing to do this, so each time a developer acquires a new site there is both acquisitions and financing involved, but this really isn't the focus when you think of developers. I think you may be getting investment banking confused with real estate development. They are two completely different industries...like tech vs industrials. You may want to check out the investment banking forum
Veritatis tempore blanditiis rerum. Vel eaque vitae culpa unde ut. Repellendus est ipsam aut quidem id et. Magnam quam perspiciatis occaecati ipsam ipsam vero. Autem rerum at iure quia sint dolore.
Accusamus modi odit tempore ut aliquid. Praesentium est a et cum facere. Quisquam fugiat non aliquid dolorem id impedit fuga. Ut ab voluptas eos aut ut exercitationem. Quo doloribus libero enim porro sed enim debitis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...